Britain's estate agents warn today that a collapse in activity in the housing market could spread to the rest of the UK economy amid signs that rising inflationary pressure will force the Bank of England to increase the cost of borrowing this year.

The Royal Institution of Chartered Surveyors (RICS) says the downturn in the property market - nine out of 10 estate agents are reporting falling prices - was likely to spill over into weaker high street spending and job losses for construction workers.

RICS data released today shows the number of transactions per estate agent - 17.4 over the past three months - is the lowest since 1978 and a drop of almost a third on a year ago. Two of Britain's leading lenders, Halifax and Nationwide, have reported in the past two weeks house prices falling sharply as tighter borrowing conditions curbed demand for property.

The monthly snapshot of the housing market from the RICS follows the release of official government data yesterday showing a sharp increase in the cost of goods leaving factory gates in the UK manufacturing sector - an early warning sign of higher inflation in the shops.

British industry had suffered a sharper increase in fuel and raw material costs since the start of 2007 than it saw in the previous two decades combined, and the threat of an inflationary spiral left the City convinced that increases in bank rate were more likely than cuts this year.

The RICS data shows that the balance of estate agents reporting falling prices has decreased slightly (92.9% in May against 94.7% in April), but that business has dried up. A RICS spokesman, Jeremy Leaf, said: "While demand remains weak and housing transactions continue to evaporate, there is a very real danger to the wider economy. The property industry will not be the only casualty in the fallout from the credit crunch, with the high street and purveyors of a range of household goods, including furniture and white goods also feeling the pinch. Construction workers, such as plumbers and bricklayers, will start to see employment opportunities dry up as the pace of housing transactions continues to abate."

Mervyn King, governor of the Bank of England, will give his view on the state of the economy today, but in the City last night money markets were braced for three separate quarter-point increases in borrowing costs by the end of the year. The bank rate has come down from 5.75% to 5% since December, but figures yesterday showing that fuel and raw material costs for British industry were rising more rapidly than at any time since the hyper-inflationary mid-1970s prompted speculation that the Bank might be forced to act.

City analysts believe increases in borrowing costs are unlikely at a time when the weakness of the housing market is leading to a reining in of spending, but they also accept further cuts are out. "UK rate markets now price in three Bank of England hikes by year end," said Michael Saunders, UK economist with Citigroup. "While easing is unlikely in the face of the inflation pressures hitting the UK from global commodities and the weak pound, we doubt the MPC will hike either."

The Lib Dem Treasury spokesman, Vince Cable, said: "These figures dramatically highlight the fact that at a time when the British economy is slowing down, inflation is also steadily increasing. It now seems we're back to 1970s stagflation."

Jonathan Loynes, of Capital Economics, said the figures were "horrible" for the Bank's nine-strong monetary policy committee. "The chances of a recession are growing by the day," he said.